Companies that produce a mix of products and services out-perform both product and services firms on four common measures of innovation outcomes, reported NC State professors Stephen K. Markham and Thomas Hollmann in the Fall 2009 CIMS Technology Management Report. Implications of their finding are 1) product firms can learn from services innovators and vice-versa, and 2) if they do, the resulting innovation processes and procedures will boost the innovation performance of both sectors.
Markham and Hollmann analyzed data from a survey by the Product Development and Management Association (PDMA )of managers in 416 companies across a variety of industries. Their first report explained how — contrary to common belief — services development is different from product development. They continue their report here by describing those differences:
Four Striking Contrasts
We identified dozens of service development practices in the PDMA sample that are statistically different from product development practices. We summarized those differences in our first TMR article by identifying four “striking contrasts”:
1. Service firms expend the most effort in the front and final stages of innovation, while goods (products) firms expend the most effort in the middle.
2. Service projects are more independent from the rest of the organization than goods projects.
3. Service projects engage in more teamwork and development while goods projects stress the use of new-product development tools.
4. Service projects emphasize skills and downplay processes while goods projects utilize process more.
These differences are striking because service projects are completed in half the time of goods projects, yet maintain, or even slightly improve, sales and profitability. Moreover, many of the differences result in shorter development times and increased sales and profitability when used by goods developers.
Not all the differences between goods and services should be applied to goods development, however. Although some of the service activities increased goods development time, we also found goods development activities that when applied to services increased service performance. Thus, we conclude that both services and goods developers can learn from each other. The chart, on page 12, shows the effect of using services practices on the development of goods. The green cells are areas where goods projects increase performance if services practices are used, while the red cells identify areas where goods projects would be hurt by using services techniques. Blank cells indicate that while the practices between goods and services differ, the difference neither increases nor decreases performance.
The relationship between goods and services practices with performance is complex. The empirical relationships we report are for a large sample; results for an individual company will likely be different. Therefore, be careful not to apply these findings without first assessing a firm’s scores on these measures.
Our results indicate that if goods producers use fewer NPD tools they will suffer reduced sales and profits. On the other hand, if they use more teams, as services do, their products will increase both sales and profits but also take longer to get to market.
Although services projects are separated from the rest of the organization more than goods projects, that separation does not lead to a difference in performance but only to a lengthening of time for incremental projects.
Goods companies using fewer NPD processes enjoy increased sales. Also, while services have less managerial oversight than goods development, that has no effect on performance. We do observe, however, that a more market- oriented approach shortens the time it takes to develop a project. On the other hand, the use of IT tools and full- time project managers lengthens the development time, although full-time project management significantly improves sales.
Services development is more aligned with (i.e., responsive to) the market and less aligned with the objectives of the firm than goods projects. Goods projects that are more aligned with the market than with the firm see a decrease in profitability. Services use more direct compensation methods, which tend to shorten the time to market.
Services firms have a stronger propensity to assessing their products’ sales and profit performance than the goods producers. This practice is important to services but has a strong negative impact on goods sales and profitability even though it has a small effect of shortening time to market on incremental projects.
Project newness means how new a product is to the market and not just the firm. Offering new products will increase sales but not profitability. It has no effect on development time. Adding more attributes to a product predictably improves sales and profits but also has the expected outcome of lengthening the time to market.
Finally, we see that sales and profitability are improved for services projects where partners share proprietary information and cooperate to meet customer needs rather than merely meet contractual requirements. Such deeper relationships also shorten the time it takes to develop radically new products.
Thus, we see goods developers can benefit if they learn from services developers to use more teams, less process, more full-time leadership, be more patient for results, work on new-to-the-market products, add attributes, and use deep partnerships to increase their sales and profits.
Similarly, goods developers reduce their time to market when they imitate services practices and are more market oriented and use more compensation tools.
Conversely, goods developers lose sales and profits when they use fewer NPD tools, don’t align their projects with the firm, and check performance too soon. They take longer to reach the market when they use services development levels of teams, full-time project leadership, and add more attributes.
These results suggest that goods developing firms can choose which performance variables they want to optimize, such as sales or time to market, and choose the services practices that will generate those results. But they must be careful in adopting services practices since some services practices have detrimental effects on goods performance.
We conducted the same analysis on how goods development practices can improve or reduce performance of services development but that will be reported later. The results reported here are limited to the sample of 416 companies that participated in the PDMA best practices study. Thus, while they may be useful for assessing your company’s services development practices, every company will differ so caution must be used before applying these finding. Furthermore, we have not established cause and effect relationships, only empirical relationships.
Stephen K. Markham
CIMS Research Associate
Poole College of Management at
NC State University
Assistant Professor, Poole College of Management
NC State University